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Skeptics: European stimulus may be too late

The European Central Bank said Thursday that it would begin buying hundreds of billions of euros worth of government bonds in an aggressive — though some say belated — attempt to prevent the eurozone from becoming trapped in long-term economic stagnation.

The bank’s president, Mario Draghi, said the central bank would begin buying bonds worth 60 billion euros ($69.7 billion) a month. That is more spending than the 50 billion euros a month that many analysts had been expecting.

The long-awaited program, known as quantitative easing, is meant to spur growth in the listless eurozone economy and to raise inflation to healthier levels. In December, inflation in the 19 countries of the eurozone fell below zero and raised the specter of deflation, a sustained decline in prices that can lead to higher unemployment and that is notoriously difficult to reverse.

As a further stimulus step, the ECB also said Thursday that it was cutting the interest rate it charges on loans to commercial banks, as long as the banks commit to lending that money to companies or individuals. The new rate would be 0.05 percent, down from 0.15 percent.

“We believe the measures taken today will be effective,” Draghi said at a news conference.

Top officials of the central bank had signaled clearly that a quantitative easing program was in the offing. But there remained, before the central bank meeting Thursday, many questions about how large the program would be and whether it would be powerful enough to reverse a two-year decline in inflation.

The ECB sometimes appears to be the sole eurozone institution seeking to restore the economy, in the absence of government spending stimulus. In contrast to the stronger recoveries of the United States and Britain, the bloc’s gross domestic product has still not regained its levels from before the onset of the financial crisis in 2007. Demand and credit demand remain feeble, and the unemployment rate has not dipped below 11 percent since early 2012.

And so the ECB’s credibility is on the line. The policy announced Thursday comes more than six years after the U.S. Federal Reserve undertook its first quantitative easing program in 2008. Indeed, in what has long been seen as a major blunder that worsened the problem, the ECB actually raised interest rates in 2011.

Programs of quantitative easing by the Fed and by the Bank of England have helped the economies of those two countries recover from the global financial crisis more successfully than the eurozone has been able to.

If successful, quantitative easing would push down market interest rates in the eurozone and make it easier for businesses and consumers to borrow money, helping to stimulate the economy and restore inflation. Quantitative easing could also have a psychological impact, helping to raise expectations that inflation will begin to rise and thus encourage people to spend now rather than wait.

Draghi said Thursday that the bond buying would continue through September 2016 or “until we see a sustained adjustment in the path of inflation, which is consistent with our aim of achieving inflation rates below, but close to, 2 percent over the medium term.”

The decision to begin buying government bonds on the open market came after a debate that lasted months. Draghi sought to overcome resistance from German members of the governing council and the broader German public, which regards quantitative easing as a form of wealth transfer to countries like Italy.

Draghi acknowledged Thursday that there had been intense discussion by the bank’s governing council about how to share the risk if a country later defaults on its debt. Draghi said that concerns about risks being transferred from some countries to others was legitimate. The compromise preserves some risk sharing, he said.

The ECB will coordinate the buying, Draghi said, but will delegate some of it to the central banks of national central banks. In a further compromise, some of the risk from bond buying will be taken by the ECB and some by national central banks.

Asked about Greece — a special case because of the political uncertainties there and because the country continues to labor under an international bailout program overseen in part by the ECB — Draghi said that the bank could buy Greek bonds. But in practice, he noted, such purchases might be limited.

Greece, he said, would have to continue adhering to the terms of its bailout program, which is also being administered by the International Monetary Fund and the European Commission. That adherence is currently uncertain, as Greece awaits national elections this weekend that could result in a new government seeking to revise the terms of the bailout.

In another crucial provision of the ECB’s program, the bank would have equal status to other bond holders — rather than holding itself above other investors and expecting to be paid back first in the event of problems. That will be important to private investors, because if the central bank held itself out as a privileged bondholder, effectively passing more risk on to other bond holders, other buyers might undermine the stimulus program by demanding higher interest rates. Although the Fed and the Bank of England used quantitative easing to rejuvenate their economies, such a program would be more complicated in the eurozone. There is no widely traded, Pan-European government bond similar to U.S. Treasury securities, which were the main vehicle for the Fed’s program.

Another question is whether quantitative easing can help fix the eurozone economy, especially since it has taken so long for the central bank to begin a large-scale bond-buying program. Many economists and businesspeople are skeptical.

“I do not believe it will have a major effect whatever will be announced,” said Karl-Ludwig Kley, chairman of Merck, a German pharmaceutical and chemicals company that is separate from Merck & Co. in the United States.

“I do not believe bond buying or whatever is the remedy,” Kley said in an interview at the annual meeting of the World Economic Forum in Davos, Switzerland. “I do not see, because of these programs, consumers buying more. I do not see companies investing more.”

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